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Four Year Plan – My pre budget 2011 VAT wish list

Thursday, December 2, 2010

by Nick Ryan

With the snow settling for the fourth day, being snowed in gives you plenty of time to consider the events of the past ten days or so and the Government announcements and IMF intervention. There has been a number of interesting discussions and the one element that continues to stick in my craw is the vast gap between the stance and direction this government demand we follow and that of a number of leading Irish and European economists. In one corner we have the government promoting growth through austerity and severe cuts while the economists continue to argue that these measures will be fatal and there is a need to stimulate growth through investment.
The Government announced its four year plan which among the raft of severe measures included the proposal to increase the VAT rate by 2% over the next four years. Is this a good move? Should we view this measure as part of the measures to promote the economic growth or, should we be advising businesses to consider any means to improve their competitive edge.
In November 2008 the UK Chancellor took the unprecedented step of implementing a temporary reduction in the higher rate of VAT effective for thirteen months from 1 December 2008. This was part of the UK governments’ measures of stemming the recessionary fallout of the banking crisis and provides businesses with the opportunity to stabilise and then increase sales. It was a confidence measure to support UK businesses, enhance their competitiveness and provide for consumer confidence. It did bring with it a number of administrative issues for businesses and the decrease was viewed by some as a negative measure for businesses. What you did see in the UK was a busier high street and, in Ireland, we saw the realisation that our consumer prices were so much higher and the new cross border shopping drive.
I am not convinced that increasing VAT will enhance growth. For the retail sector especially high rents per square foot and a higher VAT rate than their nearest competitors in the UK will result in a fierce strain on their competitiveness and push more of their expected customers towards online sales from UK sellers. For other sectors including the not for profit this will result in an increase in costs which, in these current times could be very damaging to fulfilling their objectives. For other businesses, an increase in VAT can result in a decrease in competitiveness.
What measures for VAT would I like to see introduced. Personally I would like to see an overall reform of the VAT rates focusing more on how VAT works for differing business and commercial sectors. Through this specific industries can be targeted in order to stimulate growth. Other reforms could provide for a wider stimulus for growth and provide for greater competitiveness in the EU marketplace.
Firstly for the construction industry, I would welcome a move to stimulate growth by following the UK in introducing reduced rates for certain projects:
• A 5% rate for the conversion and redevelopment of old industrial units/buildings when converted for either the use for new businesses/commercial hubs/local artisan facilities or, to either lower entry housing accommodation or student facilities.
• A zero rate for the construction and/or redevelopment of premises for the not for profit sectors where the facility is to be put for charitable use.
To stimulate growth within the travel/tourism sector I would recommend that the lower rate for VAT be applied to supplies provided under the Tour Agents’ Margin Scheme. I think to leap from no VAT to 21% is too big a margin.
To enhance competitiveness within the EU market place and to stimulate growth within Ireland for business to consumer sector I would recommend a two year reduction in the higher rate to 19% though there would be a need to ensure that this reduction in VAT is passed on to the end customer with a reduction in the rrp.
Finally, in the not for profit sector there should be recognition that charities do make taxable supplies of goods and services through there fund raising activities where goods etc. are bought in for resale. Therefore charities should have the entitlement to register for VAT where they are engaged in business activities.

Do you agree with the proposal outline in the 4 year plan? Would you support my VAT wish list? What measures would you propose? Send us your comments and we will provide a summary of these in the next issue.